Days of Reckoning for The Media Economy

I am pleased and honored to have been included in this article about the struggles of venture-backed media startups to grow and achieve profitability in the current environment. This is relevant and timely because of the well-documented struggles of companies such as Vice and BuzzFeed. But it also should trigger a broader consideration of the overall media economy. I believe that the big disruptive factor for media companies is that they are surrounded by competitors with offset economics: the platform companies on one side and venture-funded startups on the other. These competitors play by different rules and have different resources than media companies. It’s as if media companies need to play according to the rules of football but the other side can use chain saws and flame throwers.

1. Platforms

This is a big deal. The Platforms are the FAANG companies (Facebook, Amazon, Apple, Netflix and Google). They have put themselves in between media companies and both their readers and advertisers. It’s important to remember that these companies are in an arms race among each other. I am pleased to say that Jeff Rayport and I first identified this threat in February 2011 in a post on the HBR blog (who Rules the Web Now [hbr.org]). Over the past ten to fifteen years, Facebook, Amazon and Google have seized the top of the click stream. They then keep or distribute that traffic to best serve their own purposes. Because they are fighting each other, they jealously squeeze all possible revenue out of the traffic. Google has increasingly referred traffic to their own pages and product listing ads. The first organic (free listing) is now below the fold on the first page of results. As a consequence, it now gets about half as much traffic as the top organic listing got three years ago. Facebook has regularly “partnered” with outside companies and then cut them loose. They did this with game companies, apps and now media companies. FB asked media companies to put their content on FB but have then cut them off. Amazon is now competing with Google for valuable commercial searches at the top of the funnel. Collectively, this means that media companies have lost direct contact with most of their readers.

On the other end, the internet display business has moved away from the historic model of aggregation and estimation (we have an audience of xx million people, 25% of whom think that they will buy your product next year) in favor of the individually addressable consumer and programmatic advertising. FB and Google now control about two-thirds of internet advertising and they are gaining share. They can use data to specifically target consumers. AMZN, which is a distant player, will still do about $2B in ad revenue this year (fact check that). Media companies get fewer and fewer RFPs directly from clients. More ad dollars are passed through exchanges and the platforms.

2. Venture funded competitors

Companies like Vice, BuzzFeed, Mic, Little Things were not actually committed to making money in the media business. Their premise was that they could achieve escape velocity with their audience and revenue growth and either go public or get acquired. Look at SNAP which got a huge valuation ($19B?) without a plausible business model. These businesses are substantial (revenues in the hundreds of millions of dollars) and have large audiences. But they are optimized for growth NOT profitability. In the case of SNAP, the investors and managers have made billions and passed the risk on to the public market investors. In effect, there has been a huge transfer of wealth from investors to the public. The public has gotten more and better content than they would pay for or that ads could support. It was therefore not a priority to make money. The valuations were based on the expectation of future growth—they were going to grow into their excessive valuations.

These companies correctly identified weaknesses in the product offerings of incumbent media companies. Their current corrections, shouldn’t mask the fact that audiences have responded well to these sites.

So what’s happening? The growth rates are slowing down. BuzzFeed, as we discussed and was mentioned in Vanity Fair, eschewed traditional display ads in favor of “native” ads. This was attractive to advertisers because they suspected that readers had learned how to skip ads. “Native” ads are woven in to the content stream by BuzzFeed employees. This is incredibly labor intensive and places more demands on the clients. It doesn’t scale well. BF is now moving back towards standard IAB display units.

3. What do media companies need to do?

Traditional media companies cannot afford to gloat over the troubles of startups. they need to continue to fix what ails their own businesses. In that regard, everything old is new again. . Media companies need to figure out who to be important to their readers and to marketers. They have gotten lazy based in many cases on some sort of implied franchise—either geographic or topical. It will be difficult for them to survive without a balanced revenue stream that includes reader payments, perhaps events, e-commerce referral fees, etc.

It’s as if traditional media companies play according to the rules of football but the other side can use chain saws and flame throwers.

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